IN THE INCOME TAX APPELLATE TRIBUNAL
"SMC" Bench, Mumbai
Before Shri D. Manmohan, Vice President
ITA No. 3254 & 3255/Mum/2013
(Assessment Years: 2005-06 & 2004-05)
M/s. Lynx Synergy & Solutions P. Ltd. Income Tax Officer - 5(2)(3)
A-307, Virwani Industrial Estate Vs. Mumbai
3rd Floor, Western Express High Way
Goregaon (E), Mumbai 400063
PAN - AAACL2681B
Appellant Respondent
Appellant by: Shri K. Sivram
Respondent by: Ms. Sonia Kumar
Date of Hearing: 28.01.2014
Date of Pronouncement: 09.04.2014
ORDER
Per D. Manmohan, V.P.
These two appeals are filed at the instance of the assessee company
and they are directed against the orders passed by CIT(A)-9, Mumbai. Since
the issues involved in both the appeals are identical the appeals are heard
together.
2. The main contention of the assessee before the Tribunal is with regard
to validity of reopening of assessment. In the event of holding that reopening
is as per law, the alternative contention of the assessee is that it is entitled
to claim depreciation on car purchased in the name of the Director and
consequently the interest on car loan as well as insurance payment should
be allowed. There were also some minor disallowances ­ with regard to
depreciation on computer package and conveyance expenses not supported
by vouchers.
3. Facts necessary for disposal of these appeals are stated in brief. In
respect of previous year relevant to A.Y. 2004-05 the assessee, who is
engaged in the business of distribution of electronic telephones, etc.
declared total income of `.1,51,440/- and the same was processed under
2 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
section 143(1) of the Act. Similarly, for A.Y. 2005-06 income of `2,82,330/-
declared in the return of income filed on 30.10.2005 was accepted under
section 143(1) proceedings.
4. Thereafter the AO received a tax evasion petition and an RTI
application alleging that the Director of the assessee company, Shri Nitin R.
Shah had purchased a motor car using unknown sources of income. On
enquiry and verification it was noticed by the AO that the car was purchased
by Shri Nitin Shah and the address given therein was not that of the
company; it was registered in the name of Shri Nitin Shah. However, the
assessee claimed depreciation on the said car and also certain expenditure,
including interest paid on the loan taken for purchase of the car. Therefore,
the AO issued a notice under section 148 of the Act after getting necessary
approval. In response thereto the assessee submitted that the return already
filed may be treated as return filed in compliance to the notices issued
under section 148 of the Act. Thereafter the assessee requested the AO to
provide the reasons for reopening of the assessment. The AO provided the
reasons wherein it was stated that based on the RTI application and
thereafter the tax evasion petition certain enquiries were made wherein it
was revealed that Shri Nitin Shah, Director of the company purchased the
car in his name. The company had taken it on record and claimed
depreciation and interest on the car loan and, therefore, he had reason to
believe that income chargeable to tax has escaped assessment for the year
under consideration.
5. During the course of hearing one of the Directors of the assessee
company alongwith the Chief Accountant appeared from time to time and
submitted that though the car was registered in the name of one of the
Directors of the company but it was meant for the use of the company and
in fact the invoice was issued by Saman Motors Pvt. Ltd. in the name of the
company. It was also submitted that the car was purchased by the company
out of its own funds and it had also taken a loan of `4,90,000/- from Ford
Credit Kotak Mahindra Ltd. and repayments were also made by the
company. The car was registered in the name of Shri Nitin Shah, Director of
3 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
the company to avail certain benefits; it is not economical under the Motor
Vehicle Act to register it in the name of the company. Shri Nitin Shah has
given a declaration that he is holding the car on behalf of the company and
he has no beneficial interest in the car. Board Resolution passed in the
meeting of the Board of Directors, ledger account of Ford Credit Kotak
Mahindra Ltd., etc. were placed before the AO.
6. The AO observed that in order to claim depreciation on motor vehicle
it has to be shown, under section 32 of the Act, that the car is owned by the
assessee. No doubt, mere non-registration of the vehicle in the name of the
company cannot disentitle/debar the company from claiming depreciation
but in the peculiar factual matrix of the case the AO was of the view that the
car was owned by the Director and not by the company. In this regard he
observed that the car was purchased and registered in the name of the
Director. Even the loan is granted in the name of Shri Nitin Shah. It was
registered on an address which is non-existent. The company claims to be
the legal owner. The only factor in favour of the assessee is that it had
repaid the loan taken by Mr. Nitin Shah and the asset has been shown in
the books of the assessee company. The AO further observed that the
company had not submitted any proof with regard to use of the car by the
company; no expenditure towards petrol, etc. was claimed against the car.
Therefore, he concluded that the entire transaction is nothing but perquisite
given to the Director in the form of repayment of loan taken by him. He also
observed that the company has not furnished any log book or control book
to show that the car was utilised for its business purposes. He thus
concluded that the assessee is not entitled to claim depreciation on motor
car. Consequently he disallowed the claim of interest on car loan as well as
insurance payment made.
7. The AO further noticed that the assessee included a sum of `25,740/-
under computer in the block of assets whereas the said computer was
purchased in the name of Lynx Systems & Services Pvt. Ltd., a sister
concern of the assessee company. Since the ownership is not with the
assessee, depreciation claimed by the assessee on this computer was
4 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
disallowed. He also made an adhoc disallowance of `15,509/- out of the
conveyance expenses on the ground that majority of the conveyance
expenses are recorded in cash and they are not fully verifiable and hence 5%
of expenditure deserves to be considered as non-business expenditure.
8. In respect of A.Y. 2005-06 also the AO reopened the assessment for
the same reasons and disallowed the claim of depreciation on car apart from
disallowing the interest claimed to have been paid on car loan and insurance
payment on the car. He also disallowed a sum of `13,189/- out of the
conveyance expenses on the ground that they are not fully verifiable.
9. Aggrieved, assessee contended before the CIT(A) that reopening of
assessment is not in accordance with law and the learned AO erred in
concluding that the assessee is not the real owner of the car, by ignoring the
judicial pronouncements in this regard. It was also contended that there is
no basis for making adhoc disallowance out of the claim of conveyance
expenses. In respect of A.Y. 2004-05, it was further contended that the AO
erred in disallowing the claim of depreciation on computer overlooking the
fact that assessee is the rightful owner of the computer.
10. The Authorised Representative, appeared on behalf of the assessee,
contended before the CIT(A) that assessee is a distributor of electronic
telephones, etc. and Shri Nitin Shah, Shri Ramesh Sethu and Shri Rajesh
Kumar are Directors of the company. Registered office of the company was
406, Bhagyalaxmi, Kennedy Bridge, Opera House, Mumbai till 31.12.2010
which was subsequently changed to A-307, Virwani Industrial Estate,
Western Express Highway, Gurgaon (E). Assessee company purchased a car
during the previous year relevant to assessment year 2004-05. To save on
Octroi and registration charges the car has been registered in the name of
the Director, Shri Nitin R. Shah. Though the loan was taken from Ford
Credit Kotak Mahindra Ltd. in the name of Shri Nitin Shah, all the
instalments have been paid by the assessee company and the asset is
properly reflected in assessee's books of account. It was also submitted that
a Board Resolution was passed for purchase of the vehicle and use of the
vehicle for company's business purposes. Under these circumstances it was
5 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
contended that reopening of assessment merely based on RTI application
and tax evasion petition is not sustainable because the AO has no reason to
believe that any income chargeable to tax has escaped assessment. In this
regard it was submitted that the main complaint of the petitioner was that
Shri Nitin Shah purchased a car from unknown sources. A letter to verify
the fact was issued to Mr. Nitin R. Shah who in turn explained the source of
purchase of car and it was also shown that it was recorded in the books of
the company. It is also stated that the car has been purchased with
company funds. There was no evidence prior to issue of notice under section
148 that the car owned and reflected in the books has been used for the
personal purposes by the Directors. It may be noticed that notice under
section 148 was issued on 29.09.2010 and administrative approval for
reopening of the case has been obtained on 17.09.2010. However, the case
of the assessee before the learned CIT(A) was that there was no evidence,
before issuance of notice under section 148 of the Act, that the car owned
and reflected in the books of the assessee company has been used for
personal purposes by the Directors and thus the reasons for reopening of
the assessment is not clear. In case the reopening of assessment is for
purchase of car from unknown sources, the same fails as the source of
purchase has been properly reflected in the books and consequently the
main reason for reopening fails. Reliance was placed upon the decision of
the Hon'ble Bombay High Court in the case of Jet Airways Ltd. 195 Taxman
117 and others. It was also contended that reassessment on the basis of
third party information without any corroborative evidence is not justified.
Without prejudice to the above ground it is also contended that the claim of
depreciation and other expenses is in accordance with law. The contention
of the assessee was that it is not necessary to get the asset registered in the
name of the company to claim ownership ­ so long as it is registered in the
name of a Director and payment of instalments are made by the company
and the asset is reflected in the books of the company assessee is entitled in
law to claim depreciation. It was also contended that the assessee company
is small and does not have adequate infrastructure and hence no logbook,
etc. has been maintained but the company has reimbursed petrol and
6 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
maintenance expenses to the Directors every month which has been debited
to the P & L Account under the head `Conveyance'. Ledger copy of
conveyance expenses was placed before the learned CIT(A). It was also
contended that there is no proof that the vehicle has been used for the
personal purposes of the Directors and hence depreciation is allowable in
the hands of the defacto owner. He also challenged the adhoc disallowance
under the head `Conveyance Expenses'. With regard to the depreciation
claimed on computer, it was submitted that the payment was made by the
company for upgradation of Tally accounting software. The company is
registered user of Tally accounting software and this payment was made
towards substantial upgradation of software and hence the same was
capitalised and depreciation claimed, though by oversight, the rubber stamp
of the sister concern was affixed despite the fact that the payment was made
by the assessee company.
11. The learned CIT(A) recorded the factual matrix of the case in detail
and after analysing the facts he arrived at a conclusion that none of the
submissions made by the assessee contain any force. With regard to validity
of reopening of assessment the CIT(A) observed that it is not in dispute that
the returns of income were processed under section 143(1) of the Act in a
routine manner and hence no opinion was formed by the AO at that point of
time. Therefore, it cannot be said that there was change of opinion while
issuing notice under section 148 of the Act. By placing reliance upon the
decision of the Hon'ble Allahabad High Court in the case of Desh Raj Udyog
vs. ITO 318 ITR 6 the learned CIT(A) observed that a notice under section
148 can be issued beyond four years if the original return of income was
merely processed under section 143(1) of the Act in a routine manner. He
also relied upon the decision of the Apex Court in the case of ACIT vs.
Rajesh Jhaveri Stock Brokers Pvt. Ltd. ITR 500 wherein it was held that in a
case where return was processed under section 143(1) of the Act, reopening
cannot be held to be invalid since there was no application of mind while
processing the return under section 143(1) of the Act. With regard to the
reasons recorded the learned CIT(A) observed that at the time of
commencement of the proceedings under section 148 of the Act what has to
7 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
be seen is the availability of prima facie material and sufficiency or the
correctness of the material was not a thing to be gone into. In the instant
case there was prima facie material to indicate that the company claimed
depreciation on a car which is in the name of one of the Directors and
therefore the AO was justified in issuing notice under section 148 of the Act.
In this regard the learned CIT(A) referred to the decision of the Apex Court in
the case of Raymond Woollen Mills Ltd. vs. ITO 236 ITR 34 wherein it was
held that sufficiency or correctness of the material need not be gone into at
the initial stage and if there is some prima facie material to show that
income assessable to tax escaped assessment the AO is entitled to reopen
the assessment. He thus upheld the action of the AO. With regard to
allowability of depreciation and other expenditure thereon the learned CIT(A)
observed that the impugned car, i.e. Ford Icon was purchased and
registered in the name of one Shri Nitin Shah. Though he was a Director of
the assessee company the loan was granted in the name of Shri Nitin Shah.
In fact, the car was not registered at the address of the assessee company
but at an address which is non-existent. He has also noticed that no proof
was adduced to show that the Ford Icon car was used by the assessee
company and petrol expenditure was not claimed by the assessee company
on the said Ford Icon. Though the company is a legal entity capable of
holding a car in its name but it has not registered the car in its name to
have dominion on the said car. The company has also not maintained log
book or control register for recording movement, running, petrol expenses,
repair expenses, drivers details, or the distance travelled by the said car.
Under these circumstances the learned CIT(A) concluded that the ownership
of the car by Shri Nitin Shah in his individual capacity cannot be doubted
and hence it cannot be treated as an asset of the assessee company. In the
light of the decision of Hon'ble Delhi High Court in the case of M.M.
Fisheries Pvt. Ltd. vs. CIT 277 ITR 204 the learned CIT(A) concluded that the
assessee is not entitled to claim depreciation, interest expenditure,
registration and insurance charges referable to the aforementioned car.
12. With regard to depreciation on computer, the learned CIT(A) noticed
that the computer/computer software was not owned by the assessee
8 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
company and, therefore, the disallowance made by the AO is in accordance
with law. It deserves to be noticed that though the assessee has raised a
specific ground with regard to 5% adhoc disallowance referable to
conveyance expenses this was not discussed independently but it was
considered in para 5.3 of his order as forming part of the ground raised with
regard to ownership of Ford Icon.
13. Further aggrieved, assessee preferred an appeal before us contenting,
inter alia, that reopening of assessment by issuance of notice under section
148 of the Act is bad in law and the tax authorities were not justified in
rejecting the claim of depreciation and expenditure on Ford Icon car as well
as on computer. It was also contended that the adhoc disallowance of 5%
referable to conveyance expenses is also not in accordance with law. It
deserves to be noticed that 5% adhoc disallowance out of conveyance was
omitted to be considered by the CIT(A) presumably because of the smallness
of the amount.
14. The learned counsel for the assessee adverted our attention to page 36
of the paper book to submit that the returns of income for assessment years
under consideration were originally processed under section 143(1) of the
Act and the assessee disclosed all facts truly and correctly and hence in the
absence of any fresh material available on record reopening of assessment
beyond a period of four years is bad in law. Vide notice dated 17.04.2009
the AO addressed a letter to Shri Nitin Shah, based on an RTI application
filed by Ms. Sonal Amit Shah, sister-in-law of one of the Directors of the
assessee company, which does not lead to any presumption that the
assessee company had not purchased the car with its own finance. On the
contrary, page 37 to 50 of the paper book shows that Shri Nitin Shah, one of
the Directors of the assessee company, had all along maintained that Ms.
Sonal Shah is no way connected to him and she had absolutely no right,
whatsoever, to have any sort of information concerning his personal affairs
and also furnished details to show that the car was purchased by him in his
individual name but it was financed by the company though it was
registered in his name. The payment was made by cheque by the company
9 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
and in respect of the balance amount finance was provided by Ford Credit
Kotak Mahindra Ltd. and the office address of the company was mentioned
in the register of the company though in the register of the transportation
authorities the car was registered under a different address. Page 43 of the
paper book shows that the car was registered on 16th April, 2003 in the
name of Nitin Rasiklal Shah but the finance was obtained by the assessee
company. Page 52 is the resolution passed by the Board Directors of the
company wherein it was stated that the car was purchased for the use by
the Directors and the assessee company entered into hire purchase
agreement with Ford Credit Kotak Mahindra Ltd. In fact Shri Nitin Shah
filed a declaration dated 14th August, 2004 that the car was registered in his
name but it was owned by the company. Page 102 of the paper book
contains the summary of vehicle expenses which reflects the reimbursement
to Directors but this document appears to have not been filed before the AO.
15. Though it was claimed to have been filed before the CIT(A) it is noticed
that there was no mention with regard to reimbursement of vehicle expenses
to the Directors. On the contrary, the learned CIT(A) observed that the
assessee company did not submit any proof of use of the Ford Icon car by
the Directors and no petrol expenditure on the said car was claimed by the
assessee company. The assessee company did not even maintain any log
book or control register for recording the movement, running, petrol
expenses, repair expenses, travel details, etc. Therefore there is no basis to
show that the assessee company had reimbursed expenditure incurred on
the said car by the three Directors.
16. The learned counsel for the assessee also filed brief written
submission wherein it was stated that based on an RTI application filed by
Ms. Sonal Shah the AO made certain enquiries with regard to the motor car
purchased and in response thereto the assessee filed details such as copy of
the invoice, etc. In fact reimbursements were made by the company and it
was shown as the asset of the company in its books. Thus no new
information has come to the knowledge of the AO so as to invoke provisions
of section 148 of the Act. The AO ought not to have acted merely on a tax
10 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
evasion petition filed by an estranged family member of one of the Directors,
particularly when there is no escapement of income in the hands of the
assessee company. Reliance was placed upon the decision of the Apex Court
in the case of CIT vs. Kelvinator of India Ltd. 320 ITR 561 to contend that
when an asset is already disclosed in the hands of the assessee reopening is
not permissible merely on the strength of a third party letter. He also relied
upon the decision of the Hon'ble Bombay High Court in the case of Prashant
S. Joshi vs. ITO 324 ITR 154 in support of his contention that reopening of
assessment is not justified without having a proper reason to believe about
escapement of income. It was also contended that disclosure in the Balance
Sheet would amount to full and true disclosure and hence the AO was not
justified in reopening the assessment. In this regard he placed reliance upon
the decision of the Hon'ble Bombay High Court in the case of Arthur
Anderson & Co. vs. ACIT 324 ITR 240. The learned CIT(A) relied upon the
decision of the Apex Court in the case of Rajesh Jhaveri Stock Brokers P.
Ltd. 291 ITR 500 whereas the learned counsel for the assessee submitted
that the aforementioned decision is not applicable to the present case as
there is no escapement of income apart from the fact that the AO has acted
merely on third party complaint without applying his mind.
17. On merits it was contended that though the car was not purchased in
the name of the assessee company, the fact remains that it was financed by
the assessee company and it was used for the purpose of the business of the
company by the Directors. It was only to save on octroi and registration
charges the car has been registered in the name of one of the Directors. In
fact the loan agreement is co-executed by the Director, Shri Nitin Shah and
the invoice is in the name of the assessee company. Even a Board resolution
was passed wherein it was stated that the car was purchased by the
assessee company for the purpose of its business and the car running
expenditure was charged to the P & L Account showing use of the car by
three Directors in which event the assessee company is entitled to claim
depreciation on the said car. Reliance was placed upon the following
decisions to contend that once an asset is registered in the name of a
Director but the payment is made by the company and declared in the
11 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
Balance Sheet of the company the asset should be deemed to be owned by
the company and depreciation ought to have been allowed in the hands of
the assessee company: -
i. ICDS Ltd. vs. CIT 350 ITR 527 (SC)
ii. CIT vs. Dilip Singh Sardarsingh Bagga 201 ITR 995 (Bom)
iii. CIT vs. Varansai Auto Sales Pvt. Ltd. 326 ITR 192 (All)
iv. CIT vs. Aravali Finlease Ltd. 341 ITR 282 (Guj)
The learned CIT(A) relied upon the decision of the Hon'ble Delhi High Court
in the case of M.M. Fisheries P. Ltd. vs. CIT 277 ITR 204. The learned
counsel for the assessee submitted that the aforesaid decision is not
applicable to the facts of the present case. He, therefore, contended that
depreciation, interest on car loan and insurance payment ought to have
been allowed as deduction in the hands of the assessee company.
18. Similarly, with regard to upgradation of computer software and
depreciation claimed thereon the learned counsel for the assessee submitted
that though the bill was mistakenly issued in the name of the sister concern
of the assessee company the same was clarified subsequently that the
assessee company has purchased the computer software. In this regard he
adverted out attention to the written submission filed before the CIT(A) (page
100) and also the confirmation letter from "First Base" wherein it is stated
that the assessee company is registered user of Tally solutions and the
amount was also received from the assessee company towards upgradation
of the software Tally. As regards the adhoc disallowance of 5% of the
conveyance expenditure the learned counsel relied upon the following
decisions to support his contention that there is bound to be some cash
element with respect to conveyance expenses and merely on that basis
adhoc disallowance is not permissible: -
i. Sayajy Iron Engg. Co. vs. CIT 253 ITR 749 (Guj)
ii. Dinesh Mill Ltd. vs. CIT 254 ITR 673 (Guj)
19. On the other hand, the learned D.R. submitted that the returns of
income were originally processed under section 143(1) of the Act wherein
there cannot be any application of mind. While reopening the assessments
12 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
under section 148 of the Act the AO obtained permission from proper
authorities after furnishing details with regard to the discrepancies found in
the registration, etc. which would clearly point out that the assessee has not
declared true and correct income and the income assessable to tax has
escaped assessment. He thus justified the action of the AO in reopening the
assessment. While arguing the issue concerning reopening of assessment as
well as the claim of depreciation and other expenditure on the said car the
learned D.R. submitted that the car was not only purchased in the name of
one of the Directors in his individual capacity but the address of Vasai was
given for registration, which does not exist at all and this in itself shows the
intention of the assessee. If it is purchased for and on behalf of the assessee
company at least the address of the company should have been given to the
road transport registration Authority. He also relied upon the decision of the
Hon'ble Delhi High Court in the case of M.M. Fisheries (P) Ltd. vs. CIT 277
ITR 204 to submit that the car is not in the name of the company and there
is no proof that the car was utilised for the purpose of assessee's business
which can easily be noticed by the fact that on one hand the assessee
company is claimed to be a very small company whereas payment was
claimed to have been made to the three Directors towards petrol, repairs and
maintenance. The expenditure in the financial year 2003-04 was claimed to
be `1,25,340/- and none of the Directors have shown as to where the car
was run and what was the purpose. The company's total income is
`1,51,440/- whereas the vehicle expenditure claimed to have been
reimbursed to the Directors for the financial year 2003-04 works out to
`1,25,340/- which highlights that the claim is not based on any material.
For the next financial year the expenditure works out to `1,04,571/-. It also
deserves to be noticed that in some months all the Directors were shown to
have utilised the car whereas in some moths one or two Directors were
stated to have utilised the car. The total petrol expenditure of more than
`15,000/- for month of April, 2003, for the new car, indicates that the car
should have run more than 120 kms. per day (including holidays), which is
impossible and thus such claim is not acceptable. He also adverted our
attention to page 21 of the paper book filed for A.Y. 2004-05 to show that
13 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
the opening stock, purchases, sales and closing stock are shown as Nil for
the year whereas a fresh claim was sought to be made at a later stage,
which is not permissible. It was thus contended that reopening of
assessment is valid since the AO has reason to believe that income
assessable to tax has escaped assessment and the car cannot be said to
have been purchased for the purpose of business of the assessee company
and it can at best be stated to be perquisite to the Directors and thus the
assessee is not entitled to claim depreciation and other expenses on the said
car in the absence of proper log book, etc. With regard to the claim of
depreciation on computer software and adhoc disallowance the learned D.R.
strongly relied upon the order passed by the AO as well as the CIT(A).
20. Joining the issue the learned counsel for the assessee submitted that
in respect of A.Y. 2005-06 the assessee declared opening stock, purchase,
etc., as could be noticed from page 26 of the paper book whereas page 21
merely refers to the effect of valuation prescribed under section 145A of the
Act; in the instant case there is nil effect on the profit or loss and it is shown
merely on page 21 whereas the total purchase and sales were declared in
page 26 of the paper book. He further submitted that with regard to
ownership of the car there is no dispute that the company owned the car
because repayments of car loan were made by the company. In Thane octroi
need not to be paid and if it is purchased in the name of the assessee
company substantial amount has to be paid towards registration, etc. and
hence as a tax planning measure the car was purchased in the name of one
of the Directors though it was to be used by all the three Directors. When
pointed out as to why so much expenditure has been incurred towards
petrol the learned counsel for the assessee could not point out the details
and the basis on which claim of expenditure was made. He merely
submitted that the directors have actually incurred the expenditure and as
claimed by them the company reimbursed the expenditure.
21. I have considered the rival submissions and carefully perused the
record. As regards the propriety of reopening of assessment it deserves to be
noticed that in the instant case the returns of income filed by the assessee
14 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
were processed under section 143(1) of the Ac. As rightly observed by the
Apex Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd.
291 ITR 500 the statute assumes two different expressions to provide the
difference between the process under section 143(1) and under section
143(3) of the Act, i.e. under section 143(1) of the Act the return is processed
and "intimation is sent" whereas under section 143(3) of the Act there is
"determination of amount" of tax payable with regard to the assessment
year. The Apex Court observed that the intimation under section 143(1)(a)
cannot be treated to be an order of assessment; therefore, in the absence of
assessment the question of change of opinion does not arise. This decision
was not directly overruled or distinguished by another Bench of Hon'ble
Supreme Court except for the fact that in the case of CIT vs. Kelvinator of
India Ltd. 320 ITR 561 (SC) the Bench considered the expression "reason to
believe" to emphasise that the AO is not empowered to arbitrarily reopen the
assessment on mere change of opinion. It can thus be seen that the decision
of the Apex Court (supra) did not overrule the earlier decision but only
emphasised the need to record the reasons to believe. In the case on hand
the AO has gathered sufficient material to come to the conclusion that the
car is purchased in the individual name of the Director and depreciation was
claimed by the assessee company, which has resulted in escapement of
taxable income. This information was obtained through the tax evasion
proceedings and enquiry thereon. Thus, it cannot be said that there is no
reason to believe that income has escaped assessment. It cannot also be
said that it is change of opinion because in 143(1) proceedings it cannot be
said that the AO has applied his mind earlier. If there is prima facie material
on which assessment is reopened, sufficiency or correctness of the material
cannot be considered at that stage, as held by the Apex Court in the case of
Raymond Woollen Mills Ltd. vs. ITO 236 ITR 34.
22. The learned counsel for the assessee also relied upon the decision of the
Hon'ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd. 195
Taxman 117 in support of his contention that if the assessee claims
depreciation in the return and the facts are already on record, merely on the
basis of a tax evasion petition filed by an estranged member of the family,
15 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
reassessment proceedings cannot be initiated. A careful perusal of the
judgement of the Hon'ble High Court reveals that the Court was concerned
with the effect of Explanation 3 to section 147 which was inserted by Finance
(No. 2) Act, 2009 whereby it is stated that eventhough reopening of assessment
is based on a particular issue the ultimate assessment can be made by taking
into consideration certain other issues which were not forming part of the
notice. The court observed that the expression "the Assessing Officer is free to
assess or reassess such income and also other income" shows that the
reassessment should be valid on the main ground for which it was reopened in
which event any other income chargeable to tax, which comes to his notice
subsequently, can be taken into consideration for assessment. The words "and
also" are used in cumulative and cognitive sense. The Hon'ble High Court thus
held that "if, after issuing the notice under section 148, the AO accepts the
contention of the assessee and holds that the income, which he has initially
formed a reason to believe had escaped assessment, has as a matter of fact not
escaped assessment, it is not open to him to independently assess some other
income. This has no application to the facts on hand. Admittedly, notice was
issued under section 148 of the Act only on the ground that the assessee
claimed depreciation and interest on the asset which was purchased by one of
the Directors of the assessee company and thus claim of depreciation and
interest has resulted in escapement of taxable income. The assessment was
also made on the same premise and hence it cannot be said that the original
reason, for which notice was issued under section 148, was dropped by the
AO. The learned counsel has also relied upon the decision of the Hon'ble
Bombay High Court (reported in 324 ITR 154 & 240 respectively) to submit
that if there is full and true disclosure at the time of filing the return, the AO is
not empowered to reopen the assessment merely on change of opinion by
holding that there is escapement of income. The Court also observed that the
reasons which were recorded by the AO for reopening of assessment are the
only reasons which can be considered when the formation of belief is
challenged. However, in the instant case there was no assessment made
originally, since the returns were processed under section 143(1) of the Act.
During the course of gathering material to respond to the RTI application, etc.
16 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
the AO gathered material by which he has formed an opinion that the income
chargeable to tax in the case of the assessee has escaped assessment by virtue
of the fact that the company has claimed depreciation on an asset which was
purchased by one of the Directors. As long as there is reason to believe that
income has escaped assessment sufficiency of reasons cannot be gone into at
that stage. Under these circumstances I am of the opinion that for the year
under consideration the reassessment proceedings are valid in law, since the
notice was issued based upon sufficient material obtained by the AO
subsequent to processing of the return.
23. As regards the claim of the assessee that the company has dominion
over the car and it is entitled to claim depreciation, it deserves to be noticed
that in the instant case the car was purchased in the name of the Director by
giving false address. The company might have decided to finance the car
purchased by taking loan and repayment thereof, which may be in the form of
giving an incentive to the Directors, i.e. money must have been intended to be
given as perquisite to the Director but that itself cannot be taken as a basis to
hold that the car was owned by the assessee company and used for the
purpose of business ­ both conditions have to be satisfied in order to claim
depreciation. As regards usage of the car the learned CIT(A) has noticed that
the company has not maintained any logbook or any other details to show that
some petrol expenses are incurred on the said vehicle. Though the assessee
submitted before the Tribunal that some expenditure was reimbursed to the
Directors and the car was used by the three Directors, a bare perusal of the
summary of alleged reimbursement of vehicle maintenance shows that in the
previous year relevant to A.Y. 2004-05 itself the company claimed to have
spent a sum of `1,25,340/- towards vehicle expenses, which is presumably the
petrol expenses. At the relevant point of time petrol rate was hovering around
`40/- per litre in Mumbai and in some months all the three Directors claimed
to have utilised the car and in terms of petrol consumption, if it is reckoned,
the car might have run for more than 180 kms. per day including Saturdays
and Sundays, which is against the preponderance of probability, particularly in
a city like Mumbai and its chaotic traffic, parking problems, etc. If it is the case
of the assessee that the car was utilised for outstation travel then there would
17 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
have been bills and reimbursement should be based on the bills and vouchers
whereas the assessee company claimed to have not maintained any bills. It is
also not shown as to what are the places of visits by them and what is the
nature of their visits. In sum and substance, the business usage of the car was
not proved, apart from the fact that the assessee company has not maintained
logbook, control register for recording the movement, running, petrol expenses,
repair expenses, travel details, etc. Having regard to the circumstances the
learned CIT(A) was justified in holding that the car was not used for business
purpose of the assessee company and basically the car was owned by one of
the Directors in his personal capacity and hence the assessee is not entitled to
depreciation on the said car. The case law relied upon by the assessee are
distinguishable on facts. In all those cases usage of car for business purpose is
not disputed though the car was registered in the name of the lessee. The court
have examined the provisions of section 2(30) of the Motor Vehicles Act that
creates a legal fiction of ownership in favour of the lessee only for the purpose
of that Act but the circumstance clearly showed that the assessee was engaged
in the business of leasing cars whereas in the instant case the assessee has
not claimed to have got the car registered in the name of the Director because
of the statutory compulsions but only to avail certain octroi and other benefits.
If a person can lie under a particular enactment by giving wrong address and
wrong name of the owner it is difficult to believe that the assessee's claim
under the Income Tax Act is genuine; it may be to avail tax benefit by claiming
depreciation. It is well settled that in order to claim any deduction the initial
onus is upon the person who claims deduction. In the instant case no material,
whatsoever, was placed to prove that the car was utilised for the purpose of
business of the assessee company. Therefore, mere payment of instalments,
insurance premium, etc. cannot lead to the conclusion that the assessee has
dominion over the vehicle and it was utilised for the purpose of business. On
the contrary, the decision of the Hon'ble Delhi High Court in the case of M.M.
Fisheries Pvt. Ltd. vs. CIT 277 ITR 204 is squarely applicable to the facts of the
instant case. Therefore, I do not find any infirmity in the order passed by the
CIT(A) on this issue.
18 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
24. Next issue is with regard to disallowance of depreciation on computer.
It may be noticed that the assessee furnished a certificate of the Tally
authorised service partner to confirm that the assessee company is the
registered user of Tally Solutions and the amount was received by demand
draft No. 637047 from the assessee company towards upgradation of
software. These facts were not disputed by the learned D.R. Under these
circumstances I hold that the assessee is entitled to depreciation on
computer software. The AO is directed accordingly.
25. Next issue is with regard to adhoc disallowance made by the AO
referable to the claim of conveyance expenses. This aspect was not
considered by the learned CIT(A) in his order. The case of the assessee is
that there is no basis for making an adhoc disallowance of 5% having regard
to the fact that with regard to conveyance expenditure various cash bills are
made in small denominations for which there cannot be third party
vouchers and the claim has to be tested with regard to the total turnover of
the business, etc. whereas the AO proceeded to make an adhoc
disallowance, which is not permissible.
26. The learned D.R., on the other hand, relied upon the order passed by
the AO.
27. Having regard to the circumstances of the case and also considering
the smallness of the amount disallowed, I am of the view that it is not a fit
case for making any disallowance. I, therefore, set aside the adhoc
disallowance made under the head `conveyance expenditure'.
28. In the result, the appeals filed by the assessee for assessment years
2004-05 and 2005-06 are treated as partly allowed.
Order pronounced in the open court on 9th April, 2014.
Sd/-
(D. Manmohan)
Vice President
Mumbai, Dated: 9th April, 2014
19 ITA No. 3254 & 3255/Mum/2013
M/s. Lynx Synergy & Solutions P. Ltd.
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) ­ 9, Mumbai
4. The CIT­ 5, Mumbai City
5. The DR, "SMC" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.